Proposal

• a deduction of the donation from the donor's income;
• a tax rebate, credit or refund at a fixed rate; and
• a grant to charities, either directly or, for example, by matching donations received.

11.2 In New Zealand, donations of money made by individuals and companies are subsidised through the tax system. Individuals receive rebates, while companies are able to claim deductions. Both forms of assistance are capped. The issues that have been raised in relation to this assistance are whether the incentives are appropriate and sufficiently flexible.

11.3 A rebate or deduction effectively provides the donor with more after-tax income and reduces the cost of donating relative to the price of other goods and services consumed by the donor. This is an advantage of providing a tax subsidy to encourage charitable giving, since it may lead to an increase in the level of donations made.²⁸

11.4 A problem with using the tax system in this way, however, is that government revenue that is forgone is determined by the donor's tax rate and the amount donated. As a result, support may be biased towards the charitable purposes chosen by higher income earners, and the government is left with no control over the aggregate amount of support it provides.

11.5 In the case of the individual rebate, this is mitigated by the rebate being allowed at a fixed 33 cents in the dollar only, and the limit on the amount of donation eligible for the rebate. Likewise, in the case of the company deduction, the company rate is fixed at 33 cents in the dollar, and the amount of the donation eligible for the deduction is capped.

11.6 Figure 1 shows the wide variety of income groups in New Zealand that claim the rebate. Even though the proportion of income earners who claim a rebate increases as income increases (from around 20 percent at $10,000 to nearly 50 percent at $100,000), those with annual taxable incomes under $40,000 claimed 70 percent of the total rebates.

Rebate limit for donations - individuals

11.7 At present, individuals can claim a tax rebate at a set 33 cents in the dollar up to a maximum of $1,500 of donations made to "donee organisations". Donee organisations are those entities that meet the requirements in section KC 5(1) of the Income Tax Act, which include all charities. Donations must be in cash in order to qualify.

Proposal

11.8 Since it was set over ten years ago the $1,500 limit would be raised in line with inflation since 1990. This would increase the limit to $1,800 per individual per year, making for a maximum rebate of $600. There should be legislative authority for this limit to be amended by regulation, which would facilitate future adjustments for inflation.

Other matters considered

11.9 The government also considered whether donations other than in cash should also be eligible for the rebate. However, to allow this would lead to increased compliance costs for taxpayers, and administrative costs for Inland Revenue, as it would give rise to questions as to the valuation of the donated goods and services. When rebates are available for non-cash donations, complex valuation rules are required, and anecdotal evidence from other jurisdictions suggests this can give rise to tax planning opportunities. Even when values are readily identifiable, the outcome of donating goods or services needs to be the same as when the goods or services are sold and the proceeds donated. For example, tax on the sale of a revenue account asset should not be avoided by donating that asset. Because of these complexities, the rebate would not be extended to non-cash donations.

11.10 Nor does the government favour introducing "payroll giving". Payroll giving is a scheme in the United Kingdom that involves donors electing in advance for regular donations to be deducted from their salary and wages on a before-tax basis. The same result can be achieved in New Zealand by donating from after-tax salary and wages and claiming a rebate from Inland Revenue. Payroll giving, although it would eliminate the need to claim a rebate in some cases, would have compliance costs for the employer. It would involve administrative costs for Inland Revenue, since levels of rebates claimed would have to be matched against payroll giving to ensure that the rebate limits were adhered to.

Deduction limit for donations - companies

11.11 At present, companies other than close companies²⁹ can claim a deduction for donations to donee organisations up to the prescribed annual limits in section DJ 4 of the Income Tax Act. Those limits are:

• a maximum to any one donee of 1 percent of net income of the company or $4,000, whichever is greater; and
• an aggregate maximum of 5 percent of net income of the company or $1,000, whichever is greater.

11.12 It can be argued that no deduction for charitable donations should be available to companies, as individual shareholders should be able to decide directly to which charities they want to donate out of the income they earn from their holding. This would not preclude companies undertaking tax deductible sponsorship or advertising, because there is either a direct or indirect benefit to the shareholder. However, because the government is committed to assisting the charitable sector the current deduction will be retained.

11.13 As with the rebate for donations by individuals, the government also considered whether donations by companies could be made in a form other than cash. For the same reasons, the government does not favour extending the deduction to cover non-cash donations.

Proposal

11.14 The current limits would be simplified by removing both the limit on donations to any one donee and the aggregate limit of $1,000. This would leave companies free to donate up to 5 percent of net income (calculated before taking account of the donation) to donee organisations in any one year. There have been recent calls for further taxpayer subsidy of donations made to educational institutions by companies. Liberalising the donation deduction rules in this way should facilitate such giving.

11.15 The removal of the $1000 limit could limit the deduction available to companies with net income of less than $20,000. However, companies with net income below this level are unlikely to be making significant donations. Further, in practice many of those companies will be closely held companies that are not entitled to the deduction.

11.16 The government also proposes that this deduction be extended to close companies provided they are listed on a recognised stock exchange.³⁰ The close company restriction is designed to protect minority shareholders, as well as to provide some level of protection to the tax base. The current restriction is unnecessary in the case of companies listed on the stock exchange, given directors' fiduciary duties to shareholders, and the public scrutiny and disclosure requirements to which listed companies are subject.

11.17 In line with proposals likely to emerge from the review of the taxation of Maori authorities, Maori authorities would be able to deduct donations to donee organisations in the same way. At present, they are allowed a deduction only for donations to Maori associations.

• Feldstein M (1975) "Income tax and charitable contributions: Aggregate and distributional effects", National Tax Journal 28(1) 81-100;
• Brown E (1987) "Tax incentives and charitable giving - evidence from new survey data", Public Finance Quarterly 15(4) 386-396; and
• Clotfelter CT (1985) "Federal tax policy and charitable giving", National Bureau of Economic Research, University of Chicago Press.

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